Barriers to trade within the European Union

Tariffs on trade within the European Union were abolished decades ago. But research by Natalie Chen and Dennis Novy finds that significant trade barriers remain, notably "technical barriers to trade," such as health and safety requirements as well as packaging and labelling requirements.

European economic integration was launched in the 1960s with the creation of customs unions, abolishing internal tariffs and trade quotas. The process was revived within the European Union (EU) by the Single European Act of 1986, which aimed to complete a Single European Market by the end of 1992.

More recently, the introduction of the single European currency – the euro – was intended to accelerate the process of trade integration by eliminating exchange rate uncertainty and increasing transparency and competition across markets.

The single market was motivated by the observation that in the 1980s, trade within Europe was still impeded by significant barriers to trade. In particular, there remained many non-tariff barriers, including so-called "technical barriers to trade."

The costs of technical barriers to trade eclipse the costs associated with being outside the euro area

These barriers result from regulations that affect the sale of goods in some markets by requiring specific product characteristics or production processes, for example, a certain package size for food products.

With intra-EU tariff barriers having been completely eliminated by 1968, technical barriers have become increasingly visible. They are also a key concern in today's global trade negotiations, with the World Trade Organisation (WTO) seeking to ensure that (from the WTO Agreement on Technical Barriers to Trade):

… technical regulations and standards, including packaging, marking and labelling requirements [...] do not create unnecessary obstacles to international trade.

So how much progress has the EU made in removing internal barriers to trade? Our research measures trade integration within the EU by examining 166 manufacturing industries in 11 member states over the period 1999-2003. We find that significant trade barriers remain and, apart from the inevitable transport costs, the most substantial costs are technical barriers.

Indeed, the costs of these barriers eclipse the costs associated with being outside the euro area. They also eclipse the costs of not abolishing physical border controls – between continental Europe and the UK – by opting out of the Schengen Agreement.

Policy action could lead to further gains from the reduction of trade barriers within Europe

In quantitative terms, we find that the costs associated with geography and transport explain 25% of the variation in trade integration. The most important factor is the weight to value of traded goods (17%), followed by the distance between the origin and destination of shipments (5%).

Policy factors explain 7% of the variation in trade integration, which is far from negligible. Technical barriers to trade are the most important factor (5%), while public procurement, Schengen and the euro only play very minor roles.

The policy implications of these results are clear. While the barriers related to geography and transport costs arise from the very nature of spatial separation between markets, policy barriers such as technical barriers to trade are in principle removable. This suggests that there is room left for policy action and that further gains are possible through the reduction of trade barriers in Europe.